A new position was established near noon on Friday in D.R. Horton Inc. (ticker DHI) by selling four December 18th, 2020 100% Cash-Secured Put options at the $67.50 strike price at $.69 per share when the price of D.R. Horton stock was $69.79 per share (3.4% above the strike price). This is a moderately conservative position since the probability of assignment on the options expiration date was 72.4% when this position was established.
The 38.3 Implied Volatility for these Put options was attractive to the Covered Calls Advisor since it is well above the current S&P 500 Volatility Index (VIX) of 22. So the $273.32 ($.69 per share x 400 shares - $1.34 commission) is a nice premium to receive for these out-of-the-money
(i.e. strike price below the current stock price) Put
options. A Cash-Secured Puts position was established rather than a Covered Calls position in this case since the time value available in the Puts was $.02 per share greater than the comparable time value in the comparable Calls at the time when the transaction was made. Also important to the Covered Calls Advisor, there is no earnings report prior to the options expiration date.
D.R. Horton is the largest homebuilder in America by market cap. Importantly, it is considered the best-in-class operator in its industry and has the highest exposure to the critically important entry-level buyers (67% of closings), lowest debt leverage, and least on-balance sheet land risk.
As detailed below, for this new D.R. Horton Cash-Secured Puts position there is potential for a +1.0% absolute
return in 8 days (equivalent to a +46.7% annualized
return-on-investment).
D.R. Horton Inc. (DHI) -- New 100% Cash-Secured Puts Position
The transaction today was as follows:
12/11/2020 Sold 4 D.R. Horton Inc. December 18th, 2020 $67.50 100% Cash-Secured Put options @ $.69 per share.
The Covered Calls Advisor does not use margin, so the detailed
information on this position and the potential result detailed below
reflect that this position was established using 100% cash
securitization for the four Put options sold.
A possible overall performance result (including commissions) would be as follows:
100% Cash-Secured Cost Basis: $26,726.68
= ($67.50 - $.69) *400 shares + $2.68 commission
Net Profit:
(a) Options Income: +$273.32
= ($.69 *400 shares) - $2.68 commission
(b) Dividend Income: +$0.00
(c) Capital Appreciation (If DHI is above $67.50 strike price at the Dec 18th expiration): +$0.00
= ($67.50 - $67.50) * 400 shares
Total Net Profit (If D.R. Horton stock price is above $67.50 strike price at options expiration): +$273.32
= (+$273.32 options income +$0.00 dividend income +$0.00 capital appreciation)
Absolute Return (If D.R. Horton stock price is above $67.50 strike price at the December 18th options expiration) : +1.0%
= +$273.32/$26,726.88
Annualized Return: +46.7%
= (+$273.32/$26,726.88)*(365/8 days)
The
downside 'breakeven price' at expiration is at $66.81 ($67.50 - $.69),
which is 4.3% below the current market price of $69.79.
